The limits of drug law enforcement

One idea about drug law enforcement is that by making the illicit traffic more expensive and dangerous for the people who sell drugs, enforcement can push up the prices of drugs and therefore reduce consumption.

The old criticism of this approach, based on the notion that demand for illicit drugs was highly inelastic, turns out to be incorrect; cocaine and heroin, at least, seem to have greater-than-unit elasticity, so a price increase will actually decrease the total amount consumers spend. So increasing drug prices would seem to be a useful goal.

The bad news is that, in the face of mass distribution, enforcement has a very hard time increasing prices. When I learned about the illicit drug markets around 1980, heroin traded at wholesale for about $250,000 per kilogram and at retail in New York for between $2 and $2.50 per pure milligram, reflecting a kilo-to-street markup of about 10x.

Now, after twenty years of intensified drug law enforcement, the wholesale price is about $70,000 a kilo and the retail price in New York about 20 cents per pure milligram. [*], a factor-of-three reduction at wholesale and a factor-of-ten reduction at retail, reflecting a greatly reduced markup. The general price level, as measured by the CPI, has roughly doubled over that period, so the inflation-adjusted price of a pure milligram of heroin is actually down about 95%.

The price drop for cocaine has been a little bit smaller: from about 80 cents per pure milligram in 1980, the price fell very rapidly until about 1988, and has since stablilized (in nominal-dollar) terms at about 15 cents per pure milligram, which adjusted for inflation is a deline of about 90%.

All of this happened in the face of an enforcement effort that increased the number of drug dealers behind bars from about 30,000 in 1980 to about 450,000 today.

The policy implication would seem to be that enforcement has limited capacity to increase the prices and thus decrease the consumption of mass-market illicit drugs, and ought to focus instead on reducing the violence and neighborhood disruption associated with the illicit trade, by targeting the meanest dealers and the ones whose trafficking is most flagrant, rather than the largest.